ISS US 2006 Day Three Report

Semiconductor Equipment Stocks Set for a Good Year, Say Analysts

Room for Further Upside if 2007 Outlook Better than Expected

Half Moon Bay, California, January 11, 2006 -- Semiconductor equipment stocks will peak sometime this year but there could be room for an upside surprise in the second half if the 2007 outlook is stronger than expected, according to analysts at today’s “Bulls and Bears” Panel session at ISS 2006.

The Bulls on the panel, which was moderated by KLA Tencor chief operating officer John Kispert, argued that device makers and foundries underinvested last year, leaving room for healthy equipment sales growth in 2006. Brett Hodess of Merrill Lynch said the equipment and materials industry was healthy overall, with the exception of a handful of such as test and automation.

Stephen O’Rourke of Deutsche Bank pointed out that the focus on increasing wafer throughput in foundries will benefit suppliers of semiconductor materials and automated material handling systems. He added that the industry looks set for a “modestly positive two year upcycle”.

Edward White of Lehman Brothers noted that equipment companies have done a good job of cutting their cost structures and can now better survive downturns. He sees a growth year ahead for equipment stocks, with peak valuations sometime in early 2007.

Timm Schulze-Melander of Morgan Stanley believes the current upturn is not a “one or two quarter event”. He cited the many new products coming out of the recent Consumer Electronics Show and MacWorld event as drivers for growth over the next year. “There is plenty of scope for us to be positively surprised,” he said.

The Bears on the panel argued that equipment stocks are overvalued and that the next peak in equipment sales is years away. Mark FitzGerald of Banc of America Securities said the 10 percent growth of the sector “is not interesting to Wall Street”, adding that three quarters of the companies have business models that don’t make sense. Further, profits in the sector are concentrated in the top five companies.

In a presentation on high tech opportunities in China, Albert Yu, former senior vice president with Intel, said that the current investment boom in China will last at least until the Beijing Olympic Games in 2008. After that, there was a risk of the bubble bursting.

He praised Chinese president Hu Jintao as being “interested and excited” in technology, which was positive for the future development of China’s high tech industry. Yu added that he believes the chip equipment and materials market in China will be bigger than the current forecasts indicate.